Bursa managed to record its best performance in first half of the year since 2009, following three consecutive years of decline. How will Bursa perform in 2H17? Can Bursa continue to deliver?

We look at five things that can influence the direction of Bursa in 2H17.

1. Oil price direction

Following the OPEC pact to cut oil production by 1.8 million barrels per day starting January 2017, crude oil prices moved in the direction that OPEC had hoped for.

However, crude oil prices seem to be under pressure recently as some shale oil producers restarted production in light of higher oil prices. If oil prices continue to stay at low levels for an extended period, it might influence the general investor confidence.

2. Bank Negara FX & monetary policy

In December 2016, Bank Negara made a shocking announcement to ban offshore Malaysian Ringgit (MYR) non-delivery forward trades and re-imposed rules on repatriation of export earnings in its bid to stabilise the MYR.

Bank Negara followed this with another initiative in April 2017 to instil investors’ confidence and foreign holdings in Malaysian government securities. The possibility of further efforts by Bank Negara to broaden and deepen the onshore financial market could lead to further support for MYR.

However, the lack of foreign currency liquidity onshore (in times of capital outflows) continues to be a risk for the ringgit.

Regarding monetary policy, Bank Negara has been keeping policy rates on hold for five consecutive meetings, even as inflation rate took a sharp acceleration in 1H17.

Bank Negara continues to maintain a neutral stance on its monetary policy to support economic activity. The market now expects Bank Negara to keep its monetary policy consistent moving forward.

Any early signs of deviation could prompt investors to relook their assumption on Bank Negara’s monetary policy stance.

3. 2018 Budget

Prime Minister Najib will be presenting the 2018 National Budget in Parliament on 27 October 2017. Being the mid-point of the 11th Malaysia Plan (2016-2020), economists, business owners and investors will be on the lookout for the plans in the 2018 budget.

Under the 11th Malaysia Plan, Malaysia is shifting its focus to developing its people’s economy and its capital economy. The aim is to become a high-income economy by 2020.

MBKE expects PM Najib to continue his strong financing support (both direct government development expenditure and off government’s balance sheet) in infrastructure development. That will likely provide some positive sentiments to buoy the Malaysian market.

4. Early general election

Malaysia is due for a general election (14GE) before August 2018. However, the prime minister can ask to dissolve the Parliament before the deadline and call for an election.

The market was previously expecting an early election to be held in October 2017. But with the possible visit from Chinese President Xi to Malaysia in October, GE14 might be pushed back.

Historically, the Malaysian stock market has been volatile in the period after the Parliament has dissolved. That is particularly true during the campaigning period.

According to CIMB, Bursa tends to deliver higher average returns post elections (up to 12 months), compared to the 12 months that precede the general election.

5. Merger & Acquisitions

Many major corporate exercises were announced early this year and will complete by this year end.

These corporate manoeuvres, including the potential exit of existing Bursa constituent stocks to accommodate the entry of new constituent stocks, will have a significant impact on the market as they represent a substantial proportion of the Bursa.

Also, the Bursa might feature a new constituent stock from a major IPO (to be listed in July) in the upcoming Bursa constituent review in December 2017. By end-2017 (or latest by mid-2018), investors will be looking at a new Bursa constituent landscape with “quite meaningful changes”.

What’s next for the Malaysian stock market?

In the next part of our three-part series, we will highlight three investment strategies that MBKE and CIMB recommend for Bursa in 2H17, followed by an article highlighting four Bursa stocks to consider.